It’s all About Fiduciary Duty to Your Clients

Everyone who listens to the news, either on the radio or TV, knows that the SEC is going after Goldman Sachs. There are significant problems to be ironed out. If, as is alleged by the SEC, there was criminal activity at Goldman, then someone needs to be treated to some free room and board for a while. That, however, will not resolve what is wrong – and neither will the Obama Financial Regulation legislation in its current form. Ron Rogé has written what is effectively an open letter that expresses this so well and directly that I will just let you read it. Here it is:

By: Ronald W. Rogé, MS, CFP®

April 20, 2010

You undoubtedly know that the SEC has sued Goldman Sachs for fraud.  I have been following the media and government pundits on this topic, and I am beginning to conclude that they just don’t get it.

Yes, I agree that for Goldman Sachs not to disclose to their retail clients that they were betting against the very products they helped create for their institutional clients and then sold those products to their retail clients, is disgraceful and unethical, even if it turns out to be legal.

fiduciary duty and responsibility

Goldman, the SEC, U. S. Congress and the media are missing the entire point about this event, as they argue the very fine details of what’s legal, what’s not.  What they are missing is that a financial advisor has a sacred relationship with his or her clients.  It’s called fiduciary duty and responsibility.

Accepting fiduciary responsibility is the first principle under which all financial regulation should be based.  No exceptions for anyone in the financial services industry.  Sadly, the new financial regulatory bill does not require a fiduciary standard.  The bill authorizes the study, not the implementation of a uniform fiduciary standard.  It will allow situations like Goldman’s to continue to perpetuate and confuse the public, as to who is a fiduciary and who is not a fiduciary.

Jack Bogle, founder of the Vanguard Group is fond of saying; — “You can’t serve two masters at the same time.”  Goldman Sachs, to my knowledge, probably did not act in the best interest of their retail clients, because they are not a fiduciary.  Their real clients are the corporations and institutions for whom they create products, which they then turn around and sell to their retail clients, as they allegedly did with mortgage backed securities, according to the SEC charges.

The problem with financial regulation in the U.S. is that rules for operating are not based on the first principle of being accountable as a fiduciary, for all of your clients all of the time.  The system is also confusing because Registered Investment Advisors (RIA’s are governed by the SEC) are required by law to be a fiduciary, whereas registered representatives of a broker-dealer (Governed by FINRA) are not fiduciaries and their allegiance, by law, is to their broker dealer, not the client.  The only filter a registered representative has to use before selling a product is a suitability test.  Playing these confusing rules of both the SEC and FINRA against one another, like a concert violinist, allowed Bernard Madoff to run his Ponzi scam as long as he did.

Goldman may try and buy their way out of this by paying a big fine and hoping the problem will go away without admitting guilt.  I hope the SEC has the wherewithal to pursue this to a proper and just conclusion.  I think Goldman’s reputation has been damaged, but history shows that they have managed to survive.

We only have one thing in life that we really own, and that’s our reputation.  As Warren Buffet has said, “Your reputation takes a lifetime to build, but only seconds to destroy.”  Goldman may have finally managed to destroy their reputation.

Goldman vs. the SEC is a teaching moment for the financial services industry, U. S. Congress, SEC, the media, and public.  It teaches us that we need a fiduciary standard as the first principle from which all financial regulation flows.  Playing the game of serving two masters at the same time is no longer acceptable behavior.  It’s time for the fiduciary standard to be the first principal from which all financial regulation is created.  Without exceptions!

As a SEC Registered Investment Advisor (RIA), we take our fiduciary duty to our clients seriously, not because it’s the law, but because it’s the right thing to do.  That’s because we answer to an even higher authority, who tells us to live by the Golden Rule — “Do to others as you would have them do to you.”

I could not have said it better myself. It really is all about fiduciary duty.

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